Correction: Tax Overhaul-States-Protecting the Wealthy story

CHERRY HILL, N.J. (AP) — In a story March 4 about some states trying to circumvent the new federal cap on state and local tax deductions, The Associated Press cited the wrong source for projections about the percentage of high-income residents in some states facing tax increases. The analysis was from the Institute on Taxation and Economic Policy, not the Tax Policy Center.

A corrected version of the story is below:

Democrats’ seek to help wealthy in response to tax changes

Democratic officials in some high-tax states are pushing legislation that would retain a federal tax break for state and local taxes, a deduction that was capped in the recent GOP tax overhaul

By GEOFF MULVIHILL

Associated Press

CHERRY HILL, N.J. (AP) — Resistance to the Republican tax overhaul comes with an ideological twist for some Democratic state officials: They’ve styled themselves as champions of the working class but are pushing hard for measures that would reduce taxes mostly for the wealthy.

Democratic governors and lawmakers in a handful of high-income, high-tax states are promoting policies that are intended to spare their residents the pain of the new $10,000 cap on deductions for state and local taxes. Connecticut, New Jersey and New York are even planning to sue the federal government over the new cap, which was a key provision of the Republican tax overhaul adopted in December.

The legislative workarounds have moved swiftly through state Senate chambers in California and New Jersey. A bill with similar components passed the Oregon Senate and House in the last two weeks. The concept is under consideration in Connecticut, Maryland, New York, Rhode Island and the District of Columbia.

Proponents say the cap on state and local tax deductions disproportionately affects states controlled by Democrats and raises the cost of living. They say that has the potential to drive well-off residents to other states.

California state Senate President Pro Tem Kevin de Leon, a Democrat sponsoring the bill there, said the state budget would take a big hit if wealthier residents flee California because they pay the bulk of the taxes.

“We have to offer services like schools, like health care, like resources for senior citizens who have Alzheimer’s,” he said.

John Moorlach, a Republican state senator, finds irony in the Democrats’ efforts.

Last year, a Democratic colleague sarcastically thanked him for taking a stance that would protect yacht owners. This year, Moorlach had a retort: “It’s rich that you guys are trying to help the wealthy now in California,” he said at a January committee meeting. “So welcome aboard.”

De Leon, who is running for U.S. Senate, said it’s the first time he’s ever been criticized for helping the wealthy.

Republican critics say the states should be reassessing their taxes instead of trying to circumvent the new tax law.

“What’s worse?” asked New Jersey state Sen. Joe Pennacchio, a Republican who voted against the work-around measure there. “Not being able to take the tax deduction or having high taxes to begin with?”

Under the deductions, known as SALT for state and local taxes, money paid to state and local governments is not counted as taxable income by the federal government in many cases. The higher a taxpayer’s state and local taxes, the bigger the benefit the federal deduction can be.

The new law caps the deduction while also lowering tax rates. Overall, it’s expected to result in reduced tax bills for most Americans, with the biggest savings going to high earners.

But in California, New Jersey and New York, a much larger share of the top 1 percent of earners — 24 to 43 percent of them — actually would see their federal taxes rise under the GOP tax law, according to an analysis from the Institute on Taxation and Economic Policy. That is largely because they would lose most of the benefit of the SALT deduction.

New Jersey Gov. Phil Murphy’s office describes the push for a work-around to the new cap on local taxes as a matter of fairness, especially if many of the federal tax breaks expire as scheduled in 2027.

“If you eliminate the cap on tax deductions, rich people who are already getting a tax break would be getting a bigger tax cut,” said Steve Wamhoff, a senior fellow at the progressive Institute on Taxation and Economic Policy.

His organization found that the average federal tax savings from eliminating the cap would be well under $1,000 per tax filer in every state for every income group, except the highest 20 percent of earners. But it would add up to tens of thousands in annual tax savings for the top 1 percent in most states — and more than $100,000 in California.

The New Jersey legislation would let local governments and schools set up charity funds. Taxpayers who donate would receive deductible tax credits toward their property taxes. Under the California bill, the contributions would be to state government entities, and 85 percent of the donations could count against state taxes.

The idea is that counting state and local taxes as charitable donations would allow them to continue being deducted from federal income. Critics say the IRS might not allow it, potentially putting tax filers in those states at risk.

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